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The Economist is out with their Big Mac Index of currency
valuations. The Big Mac indexlooks at
foreign-exchange rates based on the theory of purchasing-power
parity (PPP), the notion prices/exchange rates should
adjust over the long run, so tradable goods cost the same across
countries. Here’ their conclusion based on the latest
data,

The Big Mac index suggests that currencies are
particularly overvalued in Norway, Switzerland and Brazil (see
chart). The continuing strength of the real is a big source of
irritation to Brazil’s finance minister, Guido Mantega, who first
trumpeted the phrase “currency wars” in 2010. Brazil battled back
by introducing capital controls in the form of taxes on foreign
purchases of Brazilian securities, but the currency remains
overvalued. In December Brazil notched a record current-account
deficit as its exports tumbled, contributing to a slide in the
economy’s growth prospects. Switzerland handled its overcooked
currency by pegging its franc to the euro in 2011. That halted
the Swiss franc’s appreciation against the then-beleaguered
single currency, although not against the dollar.

Currencies in much of the emerging world, including
Russia, China, and India, are too cheap relative to the dollar on
our gauge. Critics of burgernomics say that you would expect
average prices to be cheaper in poor countries than in rich ones
because labour costs are lower: PPP signals where exchange rates
should head over the long run, as a country like China gets
richer, not where prices should be right now. Even so, the
perennially undervalued yuan has scarcely moved towards the Big
Mac measure of fair value. That, many reckon, is down to meddling
by the chefs at the People’s Bank of China, who are relying on
export growth for sustenance: China posted a larger-than-expected
$36.1 billion trade surplus in December, thanks to 14% growth in
exports year-on-year.

Japan is the country that caused the most recent talk
of currency battles. The new government’s plan to reflate the
economy with fiscal and monetary stimulus has helped drive the
value of the yen down in recent months. The Big Mac index put the
yen close to fair value against the dollar in July; it is more
than 19% undervalued now. That’s a tasty development for Japanese
exporters but indigestible news for rivals.